Brazil: Caixa makes a hybrid first

Caixa Economica Federal (CEF) has issued Latin America’s first fully market-distributed Basel III-compliant hybrid transaction.

The Brazilian state bank sold a $500 million deal in mid-July, pricing the 7.25% coupon on the 10 non-call five bonds at par, or 555 basis points over US Treasuries. BB Securities, Bank of America Merrill Lynch, Bradesco BBI, BTG Pactual, Deutsche Bank and HSBC led the landmark transaction, which was priced in the mid-range of initial thoughts of low-to-mid 7% and in line with guidance of 7.25%.

In May, Caixa placed a 4.25%, $1.3 billion five-year bond, which was priced at 265bp over treasuries, 20bp tighter than initial price thoughts. At the time, banks reported that the deal was done to get a reference point to this hybrid transaction.

Santander’s Mexican and Brazilian banks had been the only other Basel-compliant hybrid issuers. Santander Mexico sold just $300 million of its total $1.2 billion to private investors (with the Spanish bank buying the balance). Santander Mexico’s paper was trading with a yield of 4.7% and a spread of 315bp over US Treasuries when Caixa executed its transaction.

However, the difference in ratings (Caixa is rated Baa2/BBB-/BBB compared with Santander Mexico’s A3/BBB+/BBB+) explains why Santander’s deal was trading well inside Caixa’s.

“This deal will act as a reference point for other trades, simply because there isn’t much other Basel III tier 2 paper issued by Brazilian banks,” says Stanley Louie, head of new products at Citi. “However, just as in any other syndicate exercise we would incorporate different reference points, making adjustments to the secondary levels to reflect specific issuer credit and security features to get closer to what will likely be the market price.”

Caixa’s coupon resets should the bond not be called at the first opportunity, which is at the end of the fifth year. At that point the bond begins to lose regulatory capital treatment at a rate of 20% a year, incentivizing Caixa to call the issue.

According to one banker who was on the deal, the structure includes a capital write-off loss absorption at the point of non-viability (PONV). A growing number of Basel III-compliant hybrids globally have either capital write-off or conversion to equity. The trigger for Caixa’s is when the common equity ratio falls below 4.5% (compared with 5.125% on Banco do Basel’s AT1 transaction). So will capital write-off become the market standard for Brazilian Tier 2 hybrids?

For the full article visit the Euromoney website

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